Friday, 12 June 2015

Back to brands - Hermes

After results and investor seminar appraisals plus travel finally time to come back to the ongoing brand analysis and specifically the work I did on the BrandZ rankings 26-50.

'Interestingly compared to parts 1 and 2 where I filtered at 40%+ only one name (Hermes) attained that level.  

Fascinatingly (although undoubtedly somewhat influenced by FX shifts) luxury good names have generally seen brand value reductions during the last year:

I wrote about Hermes last year and established a 'buy' price which is currently noticeably lower than the current share level (link here).  Time for another brand level review...'

So what to think about Hermes?

Well as a quick reminder of their key areas: 

Leather Goods-Saddlery

Leather goods-saddlery, the original métier of the house of Hermès, is expressed in collections of bags and cluthes, briefcases, luggage, diaries and writing products, smal leather goods, saddles, and equestrian articles and clothing for both horse and rider. Its turnover in 2014, representing 45 % pf the Group's sales, attained 1.842 million euros, an increase of 15 % at constant exchange rates.

Ready-to-wear and accessories

The ready-to-wear and faschion accessories métier is the Hermès Group's second largest sector, with consolidated sales of 23%. In 2014, it generated €934 million in sales, a rise of 12 % at constant exchange rates.

Silk & Textiles

Silk and Textiles is Hermès’ third largest sector and accounts for 12% of sales. In 2014, sales of scarves and ties totalled €482 million, up 8% at constant exchange rates.

Other Hermès métiers

The other Hermès métiers cover jewellery, the art of living and the tableware. In 2014, they achieved sales of €281 million, representing a 15% rise at constant exchange rates and accounting for 7 % of the group’s total turnover.
The company driven by their strong brand has performed very well over the last few years as detailed below...

...and the recent Q1 trading update of late April confirmed that 2015 progress was solid both geographically (even FX adjusted - note the better tone even versus today's Prada comments I discussed earlier here)...

...and by product line: 

And the outlook?  'Despite the economic, geopolitical and monetary uncertainties around the world, the objective for revenue growth in the middle term at constant exchange rates is c.8%'.  

Clearly that rate is lower than the level historically achieved but in the wider scheme of things is impressive.  An equivalent rise in operating profitability (a reasonable assumption all things considered) would put the FY15e level at Euro1.4bn and with net cash at Euro1.5bn conservatively would play the company's valuation at a current Euro36bn or x25s EV/ebit.  

That is full...even for a performing brand.  What multiple would an investor feel comfortable with.  Even rolling the numbers forward another year (so FY16e) and placing the stock on a x16 EV/ebit multiple (the sort of metric I would regard as appropriate for a well run, high brand business with a super strong balance sheet) would put a 'look' price on the shares of c. Euro240...a mere 35% below the current share price. 

However with over 40% currently of the company's EV covered by brand value it is not unreasonable to cut Hermes some slack.  A 'flag' level below Euro300 therefore is worth noting - a point where getting on for 60% of the then corporate EV will be covered by the brand value.  

That's the level I will write down then. 

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